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Transcript of Threshold
The company works to establish a cycling market in the United States similar to the European market through partnerships and management of events, in addition to marketing for the sport.
Create niche market for the cycling within the United States
Grow the revenue through the lease of company assets. 2. Strategy: Threshold needs additional financing to meet their strategic goals.
The company is looking to partner through contracts with current cycling event sponsors
The founders want to create a total of 6 new races within 3 years.
Owners are requesting $500,000 to providing working capital for these goals. 3. Ch0ices:
Overall Assumption : Needed working capital is really $500k a. Common Stock b. Preferred Stock:
A max of 10 shares at $50,000 with a interest rate of 20% (demanded by investors) rather than the 10% stated in the initial proposal c. Debt
4. Recommendation: Mixed Financing This is the initial income sheet removing the capital expenditure and adding in tax at a 40% rate. Based on the balance sheet, we calculated the WACC for the firm currently and determined a 6% growth rate based on a 3% economic growth rate and 3% inflation. Based on the WACC we determined the Fair Market Value Initial Financial Information The infusion of $500,000 alters the cash flow of the firm Increase in the equity by $500,000 with common shares.
Debt equity ratio decreases by 80% but WACC increases by 21% The Firm FMV decreases to $4,8M Pros :
Low level of debt, improved leverage margin
More flexible financing options than preferred stock
Does not require a financial guarantee from founders
Smaller pie for more people. The FMV of the firm decreases by approximately $2.8M from the initial value
Timing problems (Can't draw on funds in an emergency or during an opportunity window - 2000 bubble) Addition of $500 000 in pure debt at a rate of 13,1%
WACC decreases from 15% t0 9% FMV increases to↗ $22,6M (but includes debt) Pros :
The firm had 135% of debt at start, but the competition has levels of debt from 2% to 158%
Increased level of debt, which increases bankruptcy risk
Difficulty of obtaining the loan: Poor debt rating
The new debt to equity ratio is very high Aim :
Maintain the value for the shareholders
Keep the debt/equity ratio acceptable Add $240k of debt, $260k preferred equity
WACC remains 15% -> value preserved Pros:
Flexible: Shares do not have to be converted until March 31, 2005.
Control: Management power is not lost since shares do not provide voting rights
Expensive but they can be covered by existing projections
Timing: Management can not predict the conversion of the stocks
Stock is non-compounding and cumulative where owners have the right to convert at any point after March 31, 2005.
Max to come due at once is $1 million. Company has enough funds to cover this burden in the budget. Profit Sharing projections
Debt ratio improves: 117%
More flexible and risk shared solution
Less debt so less risk of bankruptcy
Helps with timing problems: Cash available through the line of credit when needed
Bank can recall the funds at any time: Poor loan terms
Must pay dividends to preferred stock, restrictions for common dividends Firm value increases by 500K